Lihua International [Part 1]: Look Past Roots To Find Deep Value

This is part one of a three part series on Lihua International Inc (NASDAQ:LIWA).

Lihua International Inc (NASDAQ:LIWA), according to the company’s own description of its operations; produces copper replacement products for the wire and copper replacement product markets within China. Effectively this means that the company recycles old copper products, cleaning and then refining the scrap metal for sales. Lihua produces two main products from recycled copper: copper anode and copper wire. At present the company has a market capitalization of $164 million and an average daily volume of 134,000 shares.

Note: I need to highlight here that Lihua International Inc (NASDAQ:LIWA) is a Chinese company, based within China with a Chinese management team, which could put some investors off. However, the company does report to, and file reports with, the SEC.

Lihua International trading at discount

That said, due to the nature of Lihua International Inc (NASDAQ:LIWA)’s listing and its Chinese roots, the company trades at a discount to the rest of the market and at a low valuation due to the general level of mistrust that surrounds Chinese companies. This low valuation is not limited to Lihua, and many similar Chinese companies trade at these low valuations due to the risk associated with Chinese investments.

Nevertheless, despite the risk that generally follows Chinese investments, Lihua International Inc (NASDAQ:LIWA) could offer deep value that is hard to pass up. So, let’s get down to Lihua’s valuation. At the end of the fiscal third quarter, Lihua’s 10-Q reports that the company had $188.3 million in cash and total liabilities of $22 million. No debt was reported. Total assets came to $351 million and shareholder equity stood at $329 million.

Lihua International’s market capitalization

On this basis, taking total liabilities away from current assets gives us a figure of $260 million based on the numbers supplied at the end of the third quarter. Overall, at a market capitalization of $164 million, Lihua International Inc (NASDAQ:LIWA) is trading below the value of both its cash and net-nets value; investors are placing no value on the company’s long-term assets. On a per-share basis, cash per share was worth $6.32 at the end of the third quarter and the company’s book value per share was $11 per share.

Additionally, the company trades at a TTM P/E of 2.6, return on equity for the past twelve months was 20% and return on assets was 15% for the same period.

So, on a valuation basis, Lihua would appear to be a deep value play. I say appear because Chinese companies are notorious for misreporting their results, so while I cannot confirm that Lihua is misleading investors, I will view the company’s financials with a modicum of skepticism.

Lihua International highly cash generative

Still, according to Lihua International Inc (NASDAQ:LIWA)’s reported numbers, the company seems highly cash generative and prepared to stay that way. In particular, on revenues of $683.4 million for the nine months ending September, Lihua reported a gross profit margin of 9.6% and a net margin of 6.3%, for the most part, all of this profit was translated into cash, which explains the company’s solid cash balance. Specifically, during the past nine months the company’s cash balance has expanded by $44 million with a near 105% cash conversion ratio for the period — impressive.

What’s more, Lihua International Inc (NASDAQ:LIWA)’s SG&A expenses are extremely low and for the nine months ending September 30th only came to a total of $8.5 million, or to put it another way, 1.2% of revenue for the period.

Author: Rupert HargreavesRupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader.Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK.Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob WolinskyEmail - Rhagraves@valuewalk.com